Archive for January 2008

For the sake of candor and clarity, let me be explicit: we are in an economic recession.

Let me also be explicit about the impact of the recession on the IT industry: we are already in the midst of a significant downturn in IT spending – not only for small and mid-size businesses but for “the enterprise.” This downturn is reflected in traditional symptoms, and predictable consequences:

Yahoo announces layoffs. For every company that publishes a layoff strategy, there are dozens of others now doing so without fanfare. In this business, they are called RIFs (Reductions In Force) and are executed in a stealth fashion but with the same objective: temporarily improve operating margins. The fact that layoffs have long-term negative consequences never prevents executives from pulling this trigger.

Apple warns The Street about the next quarter. For every bellweather company (i.e., stocks that are worth holding for the long-term) that has the courage to forecast their concerns, there are dozens scrambling to tightly manage expenses (postpone implementations, terminate consulting contracts, institute hiring freezes).

Consumer Confidence wanes. As I have stated to analysts for five years, there is no difference between enterprise IT spending and consumer confidence statistics. Companies are simply aggregated consumers. Consumers worry about their jobs and mortgages; companies worry about stock prices and nervous customers.

I said this yesterday in a phone call with a New York analyst with whom I’ve worked for many years. She asked the question that haunts everyone who invests (either their time or their money) in tech stocks: Is there anything on the tech horizon that can be viewed in a positive light?

I’ve been considering the question all night and morning, but before I offer my tentative and humble response, two important disclaimers:

I do not own any tech stocks, nor am I affiliated with any institutions that benefit from them.

I might be wrong. But I don’t think so.

The current recession/downturn is not new. The 80’s and 90’s have clear examples of similar events, and the process for unraveling the complex issues leading to a rebound always take longer than most economists care to admit. The current mortgage crisis is different than the “bubble burst” of 2001-2002 (the natural ebb and flow of exuberance followed by caution and/or panic) because of our national debt. It was only eight years ago that we benefited from a balanced budget. I hesitate to introduce politics into this discussion, except to point out that when we (as individuals or as a nation) are in massive debt, our capacity to rebound is severely limited.

The Fed reduction(s) in interest rates are important, and certainly helped to avoid a disaster yesterday on The Street, but we can’t perform such tricks every day. We simply don’t have enough silver bullets. And Congress? The overall economy will be worse by the time legislation passes, and frankly, if I am one of the lucky ones to get a rebate check, I’m not going to suddenly feel better and start buying new gadgets with my $800. I’ll pay my rent or my Blue Shield bill.

What could the Congress do (not in any current plans that I have heard/read)?

The best business incentive imaginable would be to substantially reward companies that retain as many employees (or, even better, have more employees) at the end of 2008 than they have today. In other words, motivate employers to keep their employees on the job. Jobs = Confidence = Spending. Seems sensible, so why haven’t we ever implemented such a strategy? Because reducing costs (layoffs) has a short-term boost on operating margins, and investors remain overly focused on next quarter’s results. Our focus on next quarter is a disease for which there is no cure.

For the discerning reader, I haven’t forgotten my colleague’s question: Is there anything on the tech horizon that can be viewed in a positive light?

Positive trends for 2008 will not be evident in the next six months. Consider this the winter of our discontent. But the first signs of recovery (by the end of this fiscal year) will likely be seen here:

Mobile Devices and the content transported to them – because they are ubiquitous, and they are the platform for the younger generation of consumers who will graduate into the workforce and replace (because of lower entry-level salaries) those of us with grey hair who may or may not have our current job by the end of this year.

Advertising – because it is the pathway to new customers when your company has lost revenue. Increased IT budgets will be one of the last signs of recovery; advertising budgets will be the early indicator.

Innovation within IT organizations – because of necessity (innovation’s mother), we will be driven to build solutions that cost $40,000 instead of buying one for $400,000. When IT begins to create solutions that can be re-packaged and sold, we become a revenue-generating team rather than a cost center; slowly but surely, we’ll be allowed to spend some of that innovation-driven revenue with our vendors/partners who, by that time, will be heavily discounting products.

This isn’t a pretty picture, folks. 2008 (the entire year) will be characterized by cost-cutting, not spending. As for the national debt, it will be another 6-8 years before we can repair that damage.